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Leverage borrowing is the practice of using borrowed funds to increase the amount of capital available for an investment or business activity. By financing part of an investment with debt, an investor or company seeks to earn a return on the total exposure that exceeds the cost of borrowing, thereby amplifying potential gains and losses.

Mechanisms and instruments. Common forms include margin loans in brokerage accounts, lines of credit, secured loans, or issuing debt to fund acquisitions. In corporate finance, leverage borrowing is central to capital structures and is a key component of leveraged buyouts, where a significant portion of the purchase price is financed with debt. Personal or retail leverage includes margin trading and mortgages or other loans used to invest.

Benefits and risks. Potential benefits include higher after-tax returns in some jurisdictions, the ability to scale investments, and improved equity efficiency. However, leverage magnifies both gains and losses; if investment returns fall below borrowing costs, returns can deteriorate rapidly. Margin borrowing can trigger margin calls, forcing rapid sale of assets, and excessive debt increases default risk, interest rate risk, and liquidity risk.

Considerations and governance. Effective use requires careful assessment of cash flow, interest coverage, and collateral value; prudent leverage typically involves stress testing, diversification, fixed-rate borrowing, or hedging against rate or market moves. Regulatory and accounting rules influence leverage metrics, disclosure, and risk management practices across institutions and funds.